Chapter 9: Stocks and Their Valuation
59.
Mooradian Corporation’s free cash flow during the just-ended year (t = 0) was $150 million, and its FCF is
expected
to grow at a constant rate of 5.0% in the future. If the weighted average cost of capital is 12.5%, what
is the firm’s
total corporate value, in millions?
a.
$1,895
b.
$1,995
c.
$2,100
d.
$2,205
e.
$2,315
60.
Suppose Boyson Corporation’s projected free cash flow for next year is FCF1 = $150,000, and FCF is expected
to
grow at a constant rate of 6.5%. If the company’s weighted average cost of capital is 11.5%, what is the
firm’s total
corporate value?
a.
$2,572,125
b.
$2,707,500
c.
$2,850,000
d.
$3,000,000
e.
$3,150,000
61.
Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If
the
required return on this preferred stock is 6.5%, at what price should the stock sell?
a.
$104.27
b.
$106.95
c.
$109.69
d.
$112.50
e.
$115.38
62.
The Francis Company is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that
dividend
is expected to grow at a constant rate of 6.00% per year in the future. The company’s beta is 1.15, the
market risk
premium is 5.50%, and the risk-free rate is 4.00%. What is the company’s current stock price?
a.
$28.90
b.
$29.62
c.
$30.36
d.
$31.12
e.
$31.90
63.
The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a
constant rate
of 5.50% per year in the future. The company’s beta is 1.15, the market risk premium is 5.00%,
and the risk-free
rate is 4.00%. What is the company’s current stock price, P0?
a.
$18.62
b.
$19.08
c.
$19.56
d.
$20.05
e.
$20.55
64.
Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow
is
10.50%, and the risk-free rate is 4.50%. What is the company’s current stock price?
a.
$14.52
b.
$14.89
c.
$15.26
d.
$15.64
e.
$16.03
65.
Goode Inc.’s stock has a required rate of return of 11.50%, and it sells for $25.00 per share. Goode’s dividend
is
expected to grow at a constant rate of 7.00%. What was the last dividend, D0?
a.
$0.95
b.
$1.05
c.
$1.16
d.
$1.27
e.
$1.40
66.
Francis Inc.’s stock has a required rate of return of 10.25%, and it sells for $57.50 per share. The dividend is
expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1?
a.
$2.20
b.
$2.44
c.
$2.69
d.
$2.96
e.
$3.25
67.
Sorenson Corp.’s expected year-end dividend is D1 = $1.60, its required return is rs = 11.00%, its dividend
yield is
6.00%, and its growth rate is expected to be constant in the future. What is Sorenson’s expected stock
price in 7 years, i.e., what is ?
a.
$37.52
b.
$39.40
c.
$41.37
d.
$43.44
e.
$45.61
68.
Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably
during the
next few years. However, the FCF is expected to be $65.00 million in Year 5, and the FCF growth
rate is expected
to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What
is the horizon (or
continuing) value (in millions) at t = 5?
a.
$1,025
b.
$1,079
c.
$1,136
d.
$1,196
e.
$1,259
69.
Misra Inc. forecasts a free cash flow of $35 million in Year 3, i.e., at t = 3, and it expects FCF to grow at a
constant
rate of 5.5% thereafter. If the weighted average cost of capital (WACC) is 10.0% and the cost of
equity is 15.0%,
what is the horizon, or continuing, value in millions at t = 3?
a.
$821
b.
$862
c.
$905
d.
$950
e.
$997
70.
You must estimate the intrinsic value of Noe Technologies’ stock. The end–of-year free cash flow (FCF1) is
expected to be $27.50 million, and it is expected to grow at a constant rate of 7.0% a year thereafter. The
company’s WACC is 10.0%, it has $125.0 million of long-term debt plus preferred stock outstanding, and
there are 15.0 million shares of common stock outstanding. What is the firm’s estimated intrinsic value per
share of common
stock?
a.
$48.64
b.
$50.67
c.
$52.78
d.
$54.89
e.
$57.08
71.
You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry
Corporation’s
intrinsic value. The firm’s WACC is 10.00%, its end–of-year free cash flow (FCF1) is expected
to be $75.0 million,
the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the
company has $200 million of
long-term debt and preferred stock, and it has 30 million shares of common stock
outstanding. What is the firm’s
estimated intrinsic value per share of common stock?
a.
$40.35
b.
$41.82
c.
$43.33
d.
$44.85
e.
$46.42
72.
Kedia Inc. forecasts a negative free cash flow for the coming year, FCF1 = −$10 million, but it expects positive
numbers thereafter, with FCF2 = $25 million. After Year 2, FCF is expected to grow at a constant rate of 4%
forever. If the weighted average cost of capital is 14.0%, what is the firm’s total corporate value, in millions?
a.
$200.00
b.
$210.53
c.
$221.05
d.
$232.11
e.
$243.71
73.
Kale Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is
11.0%
and FCF is expected to grow at a rate of 5.0% after Year 2, what is the firm’s total corporate value, in
millions?
Year
1
2
Free cash flow
−$50
$100
a. $1,456
b. $1,529
c. $1,606
d. $1,686
e. $1,770
74.
Ryan Enterprises forecasts the free cash flows (in millions) shown below. The weighted average cost of capital
is
13.0%, and the FCFs are expected to continue growing at a 5.0% rate after Year 3. What is the firm’s total
corporate value, in millions?
Year
1
2
3
FCF
−$15.0
$10.0
$40.0
a. $314.51
b. $331.06
c. $348.48
d. $366.82
e. $386.13
75.
Based on the corporate valuation model, Wang Inc.’s total corporate value is $750 million. Its balance sheet
shows $100 million notes payable, $200 million of long-term debt, $40 million of common stock (par plus
paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firm’s value of equity,
in millions?
a.
$386
b.
$406
c.
$428
d.
$450
e.
$473
76.
Based on the corporate valuation model, Gay Entertainment’s total corporate value is $1,200 million. The
company’s
balance sheet shows $120 million of notes payable, $300 million of long-term debt, $50 million of
preferred stock, $180 million of retained earnings, and $800 million of total common equity. If the company
has 30 million shares of
stock outstanding, what is the best estimate of its price per share?
a.
$21.90
b.
$24.33
c.
$26.77
d.
$29.44
e.
$32.39
77.
Based on the corporate valuation model, the total corporate value of Chen Lin Inc. is $900 million. Its balance
sheet
shows $110 million in notes payable, $90 million in long-term debt, $20 million in preferred stock, $140
million in
retained earnings, and $280 million in total common equity. If the company has 25 million shares of
stock outstanding,
what is the best estimate of its stock price per share?
a.
$22.03
b.
$24.48
c.
$27.20
d.
$29.92
e.
$32.91
78.
Based on the corporate valuation model, Morgan Inc.’s total corporate value is $300 million. The balance sheet
shows $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100
million of
common equity. The company has 10 million shares of stock outstanding. What is the best estimate
of the stock’s
price per share?
a.
$12.00
b.
$12.64
c.
$13.30
d.
$14.00
e.
$14.70
79.
Carter’s preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its
nominal
(not effective) annual rate of return?
a.
8.03%
b.
8.24%
c.
8.45%
d.
8.67%
e.
8.89%
80.
Rebello’s preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00 per share. What is its
effective
annual (not nominal) rate of return?
a.
6.62%
b.
6.82%
c.
7.03%
d.
7.25%
e.
7.47%
81.
Nachman Industries just paid a dividend of D0 = $1.32. Analysts expect the company’s dividend to grow by
30% this
year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on
this low-risk
stock is 9.00%. What is the best estimate of the stock’s current market value?
a.
$41.59
b.
$42.65
c.
$43.75
d.
$44.87
e.
$45.99
82.
Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product.
Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which
competition
will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s
last dividend, D0,
was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%.
What is the current
price of the common stock?
a.
$26.77
b.
$27.89
c.
$29.05
d.
$30.21
e.
$31.42
83.
The Ramirez Company’s last dividend was $1.75. Its dividend growth rate is expected to be constant at 25%
for 2
years, after which dividends are expected to grow at a rate of 6% forever. Its required return (rs) is 12%.
What is
the best estimate of the current stock price?
a.
$41.58
b.
$42.64
c.
$43.71
d.
$44.80
e.
$45.92
84.
Ackert Company’s last dividend was $1.55. The dividend growth rate is expected to be constant at 1.5% for 2
years,
after which dividends are expected to grow at a rate of 8.0% forever. The firm’s required return (rs) is
12.0%. What
is the best estimate of the current stock price?
a.
$37.05
b.
$38.16
c.
$39.30
d.
$40.48
e.
$41.70
Total CFs
$42.2043
85.
Huang Company’s last dividend was $1.25. The dividend growth rate is expected to be constant at 15% for 3
years,
after which dividends are expected to grow at a rate of 6% forever. If the firm’s required return (rs) is
11%, what is
its current stock price?
a.
$30.57
b.
$31.52
c.
$32.49
d.
$33.50
e.
$34.50
86.
Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed
all of
its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans
to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to
increase it at a
constant rate of 8.00% thereafter. Management’s forecast of the future dividend stream, along
with the forecasted
growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate
of the stock’s current
value?
Year
0
1
2
3
4
5
6
Growth rate
NA
NA
NA
NA
50.00%
25.00%
8.00%
Dividends
$0.000
$0.000
$0.000
$0.250
$0.375
$0.469
$0.506
a. $ 9.94
b. $10.19
c. $10.45
d. $10.72
e. $10.99
50.00%
87.
Savickas Petroleum’s stock has a required return of 12%, and the stock sells for $40 per share. The firm just
paid a dividend of $1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D4 =
$1.00(1.30)4 = $2.8561. After t = 4, the dividend is expected to grow at a constant rate of X% per year forever.
What is the stock’s expected constant growth rate after t = 4, i.e., what is X?
a.
5.17%
b.
5.44%
c.
5.72%
d.
6.02%
e.
6.34%
Estimated rs =
100%
Actual Market Price, P0:
$15.00
Rapid growth
Normal growth
1
2
3
4
5
the Actual Market Price)
88.
Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE), asked you to help her estimate the
intrinsic
value of the company’s stock. FCE just paid a dividend of $1.00, and the stock now sells for $15.00
per share. Sally
asked a number of security analysts what they believe FCE’s future dividends will be, based on
their analysis of the
company. The consensus is that the dividend will be increased by 10% during Years 1 to 3,
and it will be increased
at a rate of 5% per year in Year 4 and thereafter. Sally asked you to use that
information to estimate the required
rate of return on the stock, rs, and she provided you with the following
template for use in the analysis.
(must be changed to force Calculated Price to equal
Year 0
Dividend growth rate (insert correct values)
10%
10%
10%
5%
5%
Calculated dividends (D0 has been paid) $1.00
HV3 = P3 = D4/(rs – g4). Find using Estimated rs.
?
?
?
?
?
?
Total CFs
?
?
?
PVs of CFs when discounted at Estimated rs
?
?
?
Calculated Price = P0 = Sum of PVs = $0.00 A positive number will be here when dividends
are estimated.
The Calculated Price will equal the Actual
Market
Price once the correct rs has been found.
Sally told you that the growth rates in the template were just put in as a trial, and that you must replace them
with the
analysts’ forecasted rates to get the correct forecasted dividends and then the estimated HV. She also
notes that the
estimated value for rs, at the top of the template, is also just a guess, and you must replace it with
a value that will
cause the Calculated Price shown at the bottom to equal the Actual Market Price. She suggests
that, after you have
put in the correct dividends, you can manually calculate the price, using a series of guesses
as to the Estimated rs. The value of rs that causes the calculated price to equal the actual price is the correct
one. She notes, though, that
this trial-and-error process would be quite tedious, and that the correct rs could be
found much faster with a simple
Excel model, especially if you use Goal Seek. What is the value of rs?
a.
11.84%
b.
12.21%
c.
12.58%
d.
12.97%
e.
13.36%
the
89.
Wall Inc. forecasts that it will have the free cash flows (in millions) shown below. If the weighted average cost
of
capital is 14% and the free cash flows are expected to continue growing at the same rate after Year 3 as from
Year
2 to Year 3, what is the firm’s total corporate value, in millions?
Year
1
2
3
Free cash flow −$20.00 $48.00 $54.00
a.
$2,650.00
b.
$2,789.47
c.
$2,928.95
d.
$3,075.39
e.
$3,229.16